Designing a Paid Time Off (PTO) policy that’s fair, compliant, and meets everyone’s needs can feel like solving a puzzle without a picture on the box. As a small or midsize business owner, you’re balancing state laws, budget limitations, and employee expectations — all while trying to maintain productivity. It’s no wonder many businesses delay creating or updating their PTO policies altogether.
But here’s the truth: a well-structured PTO policy isn’t just a legal checkbox — it’s a powerful tool for attracting talent, reducing turnover, and improving productivity. And the process doesn’t have to be overwhelming.
At Lift HCM, we’ve guided hundreds of businesses through building PTO policies that are clear, compliant, and customized to their needs. In this step-by-step guide, we’ll walk you through everything you need to know — from choosing the right type of PTO to meeting legal requirements and tracking time off effectively — so you can create a PTO policy that works for your business and your people.
Table of Contents
- What Is a PTO Policy — and Why Your Business Needs One
- Step 1: Choose the PTO Policy Type That Fits Your Business
- Step 2: Understand the Legal Requirements for PTO Policies
- Step 3: Draft Clear PTO Guidelines and Communicate Them Effectively
- Step 4: Balance Flexibility with Fairness
- Step 5: Track and Manage PTO with the Right Tools
- Frequently Asked Questions About PTO Policies
- Elevate Your Business with a Smarter PTO Policy
What Is a PTO Policy — and Why Your Business Needs One
A PTO (Paid Time Off) policy is a set of rules your company follows to let employees take paid leave from work. This can include vacation days, personal days, sick leave, and sometimes even public holidays. A typical PTO policy covers:
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How PTO is earned or accrued
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How employees request time off
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What happens to unused time (carryover or payout)
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Any restrictions (such as blackout periods or maximum balances)
Clear PTO policies are about more than compliance — they’re a strategic advantage. According to Society for Human Resource Management (SHRM), 63% of employees say a company’s PTO policy is a deciding factor in whether they stay. That means your policy can directly impact retention, morale, and your ability to attract talent.
Step 1: Choose the PTO Policy Type That Fits Your Business
The first step in creating your PTO policy is choosing the structure that makes the most sense for your team and operations. Most businesses choose from three main types.
Traditional Accrual PTO: A Predictable, Structured Approach
The most common PTO model is accrual-based, where employees earn time off gradually based on their length of employment. For example, they might earn 1.5 days of PTO per month, totaling 18 days per year.
Pros:
- Predictable and easy to budget
- Encourages planning and accountability
- Familiar to most employees
Cons:
- May feel restrictive if accrual is slow
- Can lead to employees hoarding PTO
- Requires careful tracking to prevent errors
Unlimited PTO: Flexibility Built on Trust
Unlimited PTO allows employees to take as much time off as they need, as long as they meet performance expectations. This model shifts the focus from hours worked to results achieved.
Pros:
- Highly attractive to talent
- Builds trust and autonomy
- Eliminates concerns about rollover and payout
Cons:
- Some employees may underuse PTO, risking burnout
- Harder to forecast staffing needs
- Requires strong communication and performance management
Hybrid PTO: A Balanced Approach
A hybrid PTO policy blends structure and flexibility. For example, you might offer accrual-based vacation but unlimited sick days. This approach provides predictability while still supporting employee needs.
Pros:
- Highly customizable
- Adapts easily to workforce changes
- Balances structure and flexibility
Cons:
- More complex to administer
- Requires clear communication to avoid confusion
Step 2: Understand the Legal Requirements for PTO Policies
PTO isn’t just an HR policy — it’s also subject to legal regulations that vary widely by state and even by city. Staying compliant is essential to avoid costly fines, lawsuits, and disputes.
Federal vs. State PTO Rules
At the federal level, there’s no law requiring paid time off. However, laws like the Family and Medical Leave Act (FMLA) guarantee unpaid leave for certain life events. Most PTO rules come from state-level laws, which may regulate:
- Accrual requirements for sick leave
- Carryover rules for unused PTO
- Whether employers must pay out unused PTO upon separation
Illinois PTO Laws: What Employers Need to Know
For small businesses in Illinois, compliance is especially important. Here are key points to know:
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Accrued PTO is considered earned wages: Under the Illinois Wage Payment and Collection Act (IWPCA), any earned but unused PTO must generally be paid out when an employee leaves unless a compliant written policy states otherwise.
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“Use it or lose it” policies are restricted: Illinois law typically prohibits policies that cause employees to lose earned PTO. If you have one, it must be clearly written and legally compliant.
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Sick leave usage: Under the Employee Sick Leave Act (ESLA), employees can use their accrued sick leave for family care — not just their own illness.
💡 Pro Tip: Even if PTO isn’t required by law, once you offer it, Illinois considers it a wage obligation — and noncompliance can lead to significant penalties.
Chicago and Cook County PTO Ordinances
If you operate in Chicago, you must also follow the Chicago Paid Leave and Paid Sick and Safe Leave Ordinance (effective July 1, 2024). It’s more generous than the state law and includes two categories of leave:
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40 hours of paid leave for any reason
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40 hours of paid sick leave
Additional Chicago-specific requirements:
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Accrual: 1 hour of paid leave per 35 hours worked.
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Carryover: Up to 16 hours of paid leave and 80 hours of paid sick leave must carry over.
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Payout: Large employers (101+) must pay out unused paid leave upon termination.
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Medium employers (51–100): Must comply with payout requirements by July 1, 2025 — just 9 months from now.
The Cook County Paid Leave Ordinance mirrors PLAWA and applies to businesses outside Chicago but within the county. It also mandates at least 40 hours of paid leave per year, accrued at the same rate.
Payroll and Record Retention Requirements in Illinois
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Payroll Records: Illinois law requires employers to keep payroll records—such as hours worked, wages paid, and deductions—for a minimum of three years. This includes time cards, pay stubs, and wage computations.
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Paid Leave Records: Records for paid leave (vacation, sick, or personal) must also be kept for at least three years, with detailed tracking of hours accrued and used.
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Personnel Records (Effective 2025): Starting in 2025, employers are required to retain personnel records, which include paid leave information, for a minimum of five years after an employee's separation.
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Chicago-Specific Rule: Employers in Chicago must keep sick leave records for a minimum of five years, as mandated by the Chicago Paid Sick Leave Ordinance.
| Record Type | Minimum Retention Period |
| Payroll Records | 3 years |
| Paid Leave Records | 3 years (5 years in Chicago) |
| Personnel Files | 5 years after seperation |
| FMLA Records | 3 years |
📌 Pro Tip: Review your PTO policy annually and consult with legal or HR experts when new legislation is passed.
Step 3: Draft Clear PTO Guidelines and Communicate Them Effectively
A PTO policy is only as effective as it is clear. Misunderstandings about how PTO is earned, used, or approved can lead to frustration and legal risk.
When drafting your policy, make sure it covers:
- Eligibility: Who qualifies for PTO (e.g., full-time, part-time).
- Accrual or usage details: How PTO is earned or requested.
- Request process: How employees submit requests and how much notice is required.
- Carryover and payout: What happens to unused PTO.
- Blackout periods: Times when PTO may be restricted.
Once finalized, include the policy in your employee handbook and go over it during onboarding. Train managers on how to apply the policy consistently to ensure fairness and avoid miscommunication.
Step 4: Balance Flexibility with Fairness
Even the most generous PTO policies can create tension if they’re not applied fairly. Balancing flexibility with consistency is key to maintaining trust and morale.
Here’s how to do it:
- Set clear expectations: Even if your PTO is unlimited, clarify how scheduling and coverage will work.
- Encourage time off: Some employees hesitate to use PTO. Regularly remind them that taking time off is both allowed and encouraged.
- Apply rules consistently: Avoid favoritism and apply the policy equally across all roles and departments.
- Ask for feedback: Survey your team about what’s working and where improvements are needed.
💚 Tip: consider including floating holidays, mental health days, or volunteer time off to support diverse needs and improve inclusivity.
Step 5: Track and Manage PTO with the Right Tools
Tracking PTO manually — especially with spreadsheets — is risky and time-consuming. Mistakes can lead to payroll errors, compliance issues, and employee dissatisfaction.
Why Accurate PTO Tracking Matters
Accurate PTO tracking ensures:
- Fairness and transparency: Employees can see how much time they’ve earned and used.
- Compliance: Detailed records help you meet legal requirements.
- Fewer disputes: Clear data minimizes disagreements about balances or approvals.
Features to Look for in PTO Tracking Software
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Employee self-service: Employees can view balances and request PTO themselves.
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Automated accruals: Eliminate manual errors and stay compliant.
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Compliance alerts: Get notified of potential issues before they become problems.
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Payroll and HR integration: Ensure seamless coordination across systems.
Frequently Asked Questions About PTO Policies
What is the best PTO policy for a small business?
It depends on your culture and operations. Many small businesses find hybrid policies most flexible.
Can employees cash out unused PTO?
In Illinois, payout is generally required under the IWPCA unless otherwise stated in your written policy. Chicago employers with 51+ employees must pay out unused paid leave as of July 1, 2025.
How do you ensure fairness in an unlimited PTO policy?
Set clear coverage and performance expectations and monitor usage.
What are the legal requirements for PTO carryover?
Under PLAWA, unused paid leave must carry over unless you front-load time. In Chicago, up to 16 hours of paid leave and 80 hours of sick leave must carry over.
How often should I review my PTO policy?
At least annually — and whenever state or local laws change.
Does PLAWA apply to remote workers in Illinois?
Yes, if an employee performs the majority of their work in Illinois, they’re covered, even if they occasionally work elsewhere.
Elevate Your Business with a Smarter PTO Policy
Ready to rethink your approach to PTO? Remember: a thoughtful, well-communicated policy doesn’t just meet regulatory requirements—it signals that you value your people and understand the realities of running a modern business. By following best practices and staying proactive with compliance, you can turn paid time off into a driver for recruitment, engagement, and growth.
If you need guidance structuring policies, staying ahead of new local requirements, or selecting the right technology for tracking and reporting, Lift HCM is here to help. Our experienced team brings hands-on support, ongoing compliance insights, and proven solutions tailored to small and midsize businesses. Let’s work together to design a PTO policy that gives you—and your employees—peace of mind, year after year.
Ready to get started? Contact Lift HCM to build a PTO strategy that keeps your business covered and your team cared for.
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